Perrigo (PRGO) Q3 2012 Earnings Call May 08, 2012 10:00 am ET Executives Arthur J. Shannon - Vice President of Investor Relations & Communication Joseph C. Papa - Chairman, Chief Executive Officer and President Judy L. Brown - Chief Financial Officer, Chief Accounting Officer and Executive Vice President Analysts Frank H. Pinkerton - SunTrust Robinson Humphrey, Inc., Research Division Gregory B. Gilbert - BofA Merrill Lynch, Research Division Louise A. Chen - Auriga USA LLC, Research Division Jami Rubin - Goldman Sachs Group Inc., Research Division David Risinger - Morgan Stanley, Research Division Randall Stanicky - Canaccord Genuity, Research Division David G. Buck - The Buckingham Research Group Incorporated Ami Fadia - UBS Investment Bank, Research Division Christopher Schott - JP Morgan Chase & Co, Research Division Jon Andersen - William Blair & Company L.L.C., Research Division Presentation Operator
Before we proceed with the call, I'd like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call. Certain statements in this call are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created thereby. Please see the cautionary note regarding forward-looking statements on Page 1 of the company's Form 10-K for the year ended June 25, 2011.I'd now like to turn the call over to Perrigo's Chairman and CEO, Joe Papa. Joe? Joseph C. Papa Thank you, Art, and welcome, everyone, to Perrigo's Third Quarter Fiscal 2012 Earnings Conference Call. Also joining me today is Judy Brown, Perrigo's Executive Vice President and Chief Financial Officer. For our agenda today, I'll provide a brief perspective on the quarter. Next, Judy will go through the details of the quarter, and then I'll provide some additional comments on our key success drivers, including new product launches, plus an overview of our expectations for the remainder of fiscal year '12. Finally, this will be followed by an opportunity for question-and-answer. Now let's just discuss the quarter. As you can see on Slide 4, we had a great quarter with strong year-over-year growth on an adjusted consolidated basis. The net sales strength was driven by strong execution across our generic prescription business, especially the integration of Paddock Laboratories; and new product sales of $64 million, with the majority of those sales coming from our Consumer Healthcare business in fiscal year '12 Q3. This top line net sales performance translated into expansion of both our adjusted gross margin and adjusted operating margin. In fact, adjusted operating margin expanded 250 basis points to a record 22.1% due to continuing operating leverage, even though we made a significantly higher incremental investment in research and development, which was up 19% versus last year.
I want to congratulate the entire Perrigo team for executing a 13% increase in net sales year-over-year, while more than doubling that on the bottom line with an increase of 32% on an adjusted basis. Furthermore, quarter-over-quarter, adjusted operating margin for each of our 4 largest business segments all increased. In this quarter, our store brand private label businesses of Consumer Healthcare and our Nutritionals segment together combined to generate approximately 73% of this quarter's sales. So great performance.Turning to Slide 5. You can see the business segment breakdown. Judy will walk you through the detail, but I want to touch just on a few items here. First, our Consumer Healthcare unit had all-time record fiscal third quarter sales. Global Consumer Healthcare sales grew 6% in the quarter, while OTC U.S. sales rose 8% despite the historically mild cough, cold, flu season which hurt sales by approximately $25 million. The growth was driven by $34 million in new product sales led by the highly successful fexofenadine product, the store brand version of Allegra; and our launch of Minoxidil Foam, the store brand version of Rogaine Foam. Adjusted operating income was up versus last year despite competitive pressures in the gastrointestinal category and promotional new product spending in advance of our expected launches in the second half of the fiscal year. We anticipated both the GI pricing pressure and the marketing cost in our plan. As a side note, the gastrointestinal pricing has appeared to stabilize over the past 6 months. Our Nutritionals segment net sales were down slightly from last year due to difficult comparables this quarter. Remember that during the fiscal second and third quarter last year, a competitor had a recall in the infant formula category, which gave us plus $8 million in additional sales in the third quarter last year. When you remove these additional sales, year-over-year, the infant nutritional business actually grew approximately 12% despite a very weak market.
Also, sales in the Vitamin, Mineral and Supplements were down over 15% in the quarter, which impacted our results. I will discuss the VMS segment further after Judy's comments.Adjusted margins in the total Nutritionals segment improved over 460 basis points versus quarter 2 fiscal year '12, as long-term supply agreements we implemented last quarter mitigated the impact of rising material cost. The Rx business had another very strong quarter. Rx net sales increased 84%, and adjusted operating income grew 130% as a result of 3 factors: number one, the successful Paddock integration; number two, the gains of market share from both Paddock and our legacy Rx business; and number three, organic net sales growth of 11% from a favorable pricing environment in our Rx business. The Rx team continues to execute very effectively in the legacy business and the Paddock integration. Looking at Slide 6, the overall OTC consumer market was relatively flat versus last year, with national brands down 2.2%. But store brands gained 6.8% on new product launches, national brand recalls and just increased market share based on IRI 52 Week Data ending April 8, 2012. This trend has also accelerated in the most recent quarter, with store brands growing 7.6% based on the latest quarterly data ending April 2012. Read the rest of this transcript for free on seekingalpha.com